MPC members say Nigerian economy still in very bad shape

MEMBERS of the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) have expressed concern that the Nigerian economy is still in a very bad shape with negative growth of -6.1 per cent in the second quarter (Q2) of 2020 and fear of negative growth in Q3 2020.

The MPC met on Monday, 21 and Tuesday, 22 September, 2020, in the light of lingering uncertainties associated with the COVID-19 pandemic and downturn in crude oil prices.

In a communique and personal statement of members, available on CBN’s website, some of the members: Adenikinju, Adeola Festus; Ahmed Aishah and Asogwa Robert Chikwendu expressed concern that the probability of a recession in 2020 is quite high. According to them, while the Purchasing Managers Index (PMI) and employment PMIs are trending upwards, the economy still needs further support.

For instance, they observed that Real Gross Domestic Product (GDP) declined by -6.1 per cent in Q2, 2020.

“This is not unexpected given the impacts of the lockdown and Covid-19 on the economy. Sectors that recorded over 10 per cent decline in Q2, 2020 included oil refining, textiles, apparel and footwear, pulp, paper and paper products, wood and wood products, non-metallic products, construction, accommodation and food services, transportation, publishing, insurance, real estates, and education.

“The fiscal system continues to pose significant challenges arising from current underperformance of government revenue, unrestrained growth in government recurrent expenditure, underperformance of capital expenditure and rising debt service ratio,” they explained.

The MPC members also highlighted that business sentiment remained weak as shown in the manufacturing and non-manufacturing purchasing managers indices, which stayed below the 50.0 points benchmark at 48.5 points and 44.7 points respectively, in August 2020. Besides, the unemployment rate rose to 27.1 per cent in Q2 2020 from 23.1 per cent in Q3 2018, indicating dampened aggregate demand.

The rising trend in domestic prices also persisted as headline inflation compared year on year (y-o-y) rose to 13.22 per cent in August 2020 from 12.82 per cent in July 2020.

Indeed, the economy, according to them, is highly challenged by three issues: economic contraction and rising unemployment, rising inflation, and weak fiscal position of the government. The external sector is also troubled with a weak balance of payments position, capital flows reversal and rising external debt.

“The levels of fiscal deficit will likely soar as oil revenues remain the dominant source of national income. Whilst rolling out elaborate fiscal austerity measures may be premature now as this may further weaken the level of aggregate demand in the Nigerian economy, a more forward-looking expenditure rationalization and fiscal consolidation strategy will remain key to averting any future devastating debt crisis,” the members warned.

However, in looking at the way forward, they observed that fiscal authorities should front-load some of the key intervention funds under the Economic Sustainability Plan (ESP) to support households and businesses at this very critical moment.

The structural impediments to growth and job creation, particularly poor infrastructure, can be improved upon via speedy implementation of the ESP, they suggested.

“The government should consider front-loading the implementation of the elements in the plan that are critical to the realization of the present growth objectives and positively impacting livelihoods and businesses.

“Efforts should be made to mobilize resources to actualize this so that the ESP will not turn out to be the case of closing the stable after the horse has escaped.”

The members, in any case, said that a superficial glance at the banking sector in Nigeria provides some room for cautious optimism that the effect of the pandemic will most likely be behind in a short period.

According to them, CBN staff data show that the return on equity for the banking industry only decreased marginally from 21.9 per cent in July 2020 to 21 per cent in August 2020, while non-performing loans (NPL) ratio decreased from 6.4 per cent in July to 6.1 per cent in August 2020.

This encouraging performance, according to them, contrasts the recent trend of the banking sector in many economies including China, South Africa and Morocco where profits have fallen sharply due to increases in bad loans.

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